Construction spending is generally tied to macroeconomics so as the economy is in fuller recovery, I would expect construction spending to be up too. Indeed, according to the most recent data from the Department of Commerce, the value of construction put in place in June is up 5.5% over the same month in 2013. However, month over month totals have been fairly flat since January. Review of the Architectural Billings Index, produced by the American Institute of Architects (AIA) Economics & Market Research Group, indicates likely continuation of this trend in the short term, with seasonal adjustments in winter and spring.
In recent years, the Architectural Billings Index has been a reasonably accurate indicator of construction spending, typically leading the market by 11 – 12 months. Beginning in November, 2013, the index fell below 50, indicating a material decline in billings, and probability for a corresponding decline in construction spending in the winter of 2014. Since May, the index has returned to positive territory, with the most significant improvements in multifamily, commercial and industrial billings and relatively flat billings for institutional properties.
Things are Warming Up
According to an article on AIA’s web site, “Spring Thaw Arrives for Architecture Firm Billings”:
“Architecture firms located in the South experienced the strongest business conditions in the country in May for the seventh consecutive month, although firms located in the Midwest also reported improving billings for the first time since October. Business conditions remain soft at firms located in the Northeast, and continue to worsen at firms located in the West, a discouraging turn following an extended period of billings growth.
“Architecture firms with a residential specialization continued to report extremely strong billings in May, and firms with a commercial/industrial specialization also saw an uptick in billings, as they have for the last five months. On the other hand, firms with an institutional specialization reported more of the same declining billings that they have experienced over the last nine months.”
Overall, the Index points to a cautious approach to recovery, without evidence of the sort of over-development which contributed to market failures circa 2009.
Architectural Billing Index as an indicator for construction spending
Information for the Architectural Billing Index has been collected since 1995, and the index has been used as a leading indicator of construction spending since 2005. The index is based on information provided by roughly 700 architectural firms around the nation. Every month, the firms report whether billings have stayed about the same, or have increased or decreased significantly. An index above 50 indicates an increase in billings, while an index below 50 indicates a decline.
The Index can be downloaded on the AIA website. In addition, an evaluation of the reliability of the index can be obtained at “Designing the Construction Future: Reviewing the Performance and Extending the Applications of the AIA’s Architecture Billings Index.”
Construction Spending and Risk Management
How is this increase in construction activity affecting how the commercial real estate industry addresses risk? Is risk management due diligence becoming more or less of a priority, and what are the project risks of greatest concern to CRE professionals? Globe Street is conducting a brief survey later this week that will shine some light on how the industry views and approaches construction and development risks in this slow but steadily improving construction market. You can participate in the survey via this link.